• Preferred picks: Telekom Malaysia (TM), Axiata Group (Axiata) and CelcomDigi (CDB). Malaysian telcos saw 5% share price returns in 2024 (2023: +0.3%), with TM outflanking (+25%) the MNOs (-5 to -9%). Excluding TM, telcos delivered a -2% return. We see another year of stock picking, noting that regulatory risks (drawn-out 5G policy saga and possible review of access prices by year-end) may continue to cast a pall on overall sector outlook (reflected in valuations). Maintain sector NEUTRAL.
• Nominal growth seen; competition should stay elevated. For 2025, we see nominal mobile service revenue (MSR) growth as usage/spending propensity may be crimped by the secondary effects of further subsidy rationalisation. Coupled with 5G monetisation challenges, mobile ARPUs may continue to reel under pressure. We see the sustained competition in the FBB segment as MNOs continue to peddle FBB-mobile packages to drive customer retention. In our view, enterprise-solutions will continue to drive 5G demand as retail use cases remain scarce. We see good progress made by the MNOs on commercialising 5G solutions across a number of verticals.
• 5G uncertainty lingers on; network collaborations a foregone conclusion. The selection of U Mobile (UM) as the second 5G network access provider has caught the market by surprise. Clarity is sought on: i) MNOs commitment to Digital Nasional Berhad (DNB) now that it no longer holds exclusive 5G access, ii) the continuity of long-term lease agreements with telcos, and iii) 5G-related capex. Our base case view is for UM to enter into network collaborations to defray 5G capex, which could range from MYR3-4bn, by our estimates. The sharing of network infrastructure would expedite site deployments, allowing population coverage targets to be met more swiftly.
• Data centres (DCs) - the story continues. The burgeoning demand for DCs should continue to benefit fixed integrated telcos. We note the completion of TM's new cable landing station in Morib would allow it to better serve the connectivity needs of new DCs sprouting up in the south of the Klang Valley. TM's JV with Singtel (ST SP, BUY, TP: SGD3.60) (51:49) to develop a 64MW artificial intelligence (AI)-DC is on track for completion by 4Q26. We previously estimated the AI-DC could potentially contribute MYR80-85m to TM's earnings (based on its stake).
• Sector valuation (-1.8SD of historical EV/EBITDA mean) is reflective of the regulatory quagmire and competitive risks. TM's ownership of core digital infrastructure assets makes it an indispensable connectivity play. We project a respectable FY24F-26F earnings CAGR of 11.7%, driving ROIC expansion. We also like Axiata for its earnings recovery and balance sheet deleveraging thesis, helped by macroeconomic tailwinds and continued operational improvements. Meanwhile, we see CDB as a value play, being a key sector laggard. Stronger merger synergies in FY25-26 should drive a re-rating of the stock. Key risks for the sector/stocks: Competition, weaker-than-expected earnings, and regulatory setbacks.

Source: RHB Research - 10 Jan 2025